Ati IcfeQigfncr Aasmatmtat
NOT MICROFILMED
For Data Entry Only
Declassified and Approved for Release0
Keyinauguration onarch of Christian Democrat Patricio Aylwin as
Metmino*first popularly elected President inearsenerally
in motionlebiscite inhe
departure of former President Augusto Pinochet and the return to an open political systemey objective of US policy toward Chile. Despite their landslide win at the polls, however, Aylwin andparty coalition face major challenges in the near term as they reassert civilian control over the government. These include:
Easing civil-miliury strains, dismantling restrictive constitutional and legislative measures, and addressing the emotionally charged issue of human rights grievances associated with the Pinochet regime.
Expanding social programs and revising Pinochet's restrictive labor code without impairing the strong performance of Chile's free market economy.
Overcoming the skepticism of the far right and the armedon by Pinochet in his current capacity as Armythe ability ofo govern, while persuading the far left to work within the political system. J
Tbe new government hasromising start. Aylwin's Cabinet appointees have won widespread public approval, and the coalitioneam of savvy, pragmatic floor managers in the new legislature who already have successfully steered some key bills through an extraordinary session. These managers, along with key Cabinet members, willivotal role in reaching understandings with the sizable moderate-rightist bloc in order to pass legislation in the coming months to reviseobstructions and eleventh-hour measures by the Pinochet regime that liir.il the civilian government's options.I
The economic course set by the new administration also augurs well. The government's commitment to continue the free market policies that have made the Chileantandout io tbe region has soothed concerns in the business communityossible shift toward more statist programs. Moves to cool the overheated economy, however, are reducing governmentcomplicating Santiago's efforts to fund modest new social programs without deficit financing.
Tbe Aylwin government's tentative first steps on the human rights front already are provoking controversy. The President's early pardon of some prisoners accused by the Pinochet regime of political "crimes" and his
establishmentuman rights investigatory committee risk provoking the political right and the military without satisfying some critics in his own coalition and the left. Likewise. Aylwin's public support for legalizing the Chilean Communista time when associated far-leftare openly threatening to kilt several officers accused of human rights abuses during the Pinochetcontributed to misgivings on the part of seniorouthiscommitment to preserve the military's institu-inierests^
On balance, we judge that Aylwin will turnenerally successful performance over the next year or so and effectively reestablish civilian control over the government. We expect him to score early gains in liberalizing the Constitution, managing the economy, adopting moderate labor code reforms, and lowering barriers to constructive civil-military relations. Factors working in his favor include his proven political skills and solid electoral mandate, the strong position of his coalition in the new Congress, broad public support for bis legislative agenda,irm intention to avoid confrontation with the military. In our view, the new government probably will also be able to parry continuing obstructionist efforts by Pinochet and bis dwindling group of hardline military
Despite our optimism. Aylwin's prospects for success could be reduced by unexpected developments, suchudden breakup of hisurge in political and labor agitation, escalating far-left terrorism, or failure of the new government to deal effectively with ihc Congress, the military, and Pinochet. Even if facedombination of suchhowever, Aylwin would still probably muddle through his first year or so in office. Although intensifying harassment by Pinochet might paralyze the Aylwinsufficient political unrest to spark military coupgive thisairly low probability.
US-Chilean relations are nowounder footing than in manyandful of potentially troublesome issues persist. The Aylwin team hopes to resolve the Leteliermost important impediment to full normalization ofthe constraints of Chilean law and of military concerns about exposing Pinochet. Several more minor bilateral issues, meanwhile, are emerging as benchmarks of US good will toward the Aylwin government, especially the prompt restoration of trading benefits under (he Generalized System of Preferences (GSP) and investment guarantee privileges by the Overseas Private Investment Corporation (OPIC) that were suspended during the Pinochet era; some US assistance for health, education, and housing projects; and US supportebt restructuring package next year.
Contents
Scopepaper assesses the likely performance of the government of President
Patricio Aylwin over the near term, weighs its prospects of consolidating democratic rule, and examines the impact on US interests. The paper also looks at the evolving roles and influence of key institutions and groups, such as Congress and the political right, former President Pinochet and the
Chile: Prospect* for the Aylwin Government I
The inaugurationopularly elected President and National Congress onarch marked the end of overears of rule by Amy Gen. Augustothe last of South America's once nurnerous military dictators to relinquish power. Thiswas tbe product of almost three years ofeffortormerly divided, ideologically diverse, and ineffectively led group of political parlies tooherent, unified strategy to unseat the once all-powerful Pinochet using his own, restrictive electoral rules. Tbe relative ease of the opposition's successive political victories against Pinochet was as surprising to its new leadership and much of tbe electorate as it was shocking to Pinochet and hardline elements in the military, who had deluded themselves Into believing that he enjoyed widespread popularity and was invincible at tbe polls. While (he switch from military to civilian rule evoked widespread euphoria. Its suddenness made many Chileans anxious about prospects for near-term political stability andeconomic growth. Moreover, many observerspolitical and economic flux in Chile over the oexi few years, marked by rumblings within tbe armed forces, increased political agitation, and doubts among key groups about the efficacy of civilian rule.
Setting tbe Stage for the New Gortmmenl Background
Chilean political life basransformation since ihe watershed plebiscite of8 in which tbe moderateby Christian Democrat Patriciodefeatedbid for another eight-year term. Although reluctant at first to accept the ot
^ Pinochet eventiequirement of ibe Constitution ofto set9 as tbe date for direct
presidential and congressional elections. Underfrom senior military officers and key moderate Cabinet members. Pusocbct abo agreed to aa earlier popular referendum on amendments to tbelhat would meet opposition demands to ease some restrictive campaign rules and shorten the term of the next President from eight to four yean. Although ihe overwhelming vote for these changes in9 was widely viewedictory for [he opposition, it left untouched several provisions favoring tbe political right in the ccegieasaonal contest, as well as the regime's authority to designate nine off tbe future Senate!
The runup io tbe national elections confirmed the erosion in Pinochet's standing as Chile's principal polilical actor and tbe corresponding increase inof the moderate opposition led by Aylwin.member Concertation of Parties for(COPODE) harmoniously endorsed Aylwinonsensus presidential nominee,nified campaign strategy, selected coogreasional candidates from virtually all COPODE panics, andophisticated, politically balanced protramj
Aylwin'i first-round victory against two rightistm balloting lhat drew aboutercent of tbe registered electorate gave him an2 percent of tbe valid votes, nearly twice his nearest rival's total. Tbe COPODE slate wonfeats in tbe Chamber of Deputies aadf tbe JI directly elected senatorial slots. Nevertheless, largely because of oooproponionalrules, in aboutistricts rightist candidates
' Ayhna bunched hit brt fee tnandn early t ram-out. dniilvr Cttnabin Dtrnocraile Perry (PDC) kadenbip reekcilononlyunea't",uS viewed ii prMBdintiil timber, da pile having tcntd DC >nniJini
were elected with fewer votes tban second-place vote-getters on the COPODE ticketj^
Pre pa riot To Assume OfBc*
As Aylwin prepared to lake office, he faced icveral daunting new tasks as Chile's first elected President iaears, including:
Making COPODE workoverningiable relationship between the
caecutive and legislative branches after the lengthy
hiatus of military rule.
Reasserting civilian control over government ai all levels by replacing officials appointed by Pinochei and by rcaiorinf local election. Reforming the judiciary, discredited by years of interference from Pinochet and the military. Implementing soundregard to thethe face of lingering skepticism in (he military and among conservatives over tbe ability of "politicians" to rule
Expanding social services and improving livingfor Ibe working classes.
Responding to tbe pent-up desire Tor increased labor freedoms without unleashing destructive strikeand excessive demands or antagonizing management
Facilitating the resurrection of the moderate right as an independent political force.
Restoring legitimacy as polilical actors to far-left parties, such as the Communists, whileesurgence of terrorist activity from either theleft or far right.
Countering the machinations of Pinochet from his powerful position as Army Commander afterarch andonstructive relationshipwith the armed forces J
Inbefore Aylwin tooknamed his choices for Cabinet members, subsecrctar-ies, and the directors of the key state-run corporations from among tbe responsible and experiencedand economists from the main parties in COPODE. His key ministers are drawn from the inner circle of advisers on whom he has relied since be became the head of the opposition coalition during the campaign for8 plebiscite. Most observers believemembcrincludes nine portfolko held by Christian Democratic Party (PDC) stalwarts, five by tbe recently reunited Socialist Party of Chilewo from the Radical Partynd tbe remainder from smaller groups ina strong, credible, team-oriented group. Individual members of the Cabinet, in our view, have greater status and influence than their piedecessors under Pinochet's highly centralizedsystem. |
Aylwin has also balanced coalition political forces within ministries)inister belonging to one party Is often matchedubsecretary from another. The party distribution of under-secretary-ships and of senior regional, provincial, and major municipal appointments roughly mirrors that of the Cabinet, with the PDC receiving about half followed by the other COPODE pariiesJ
controversy with other parties concerning theof legislative leadership posts. The coalition reached agreement in February with one of the two mcderate-rightisi parties on dividing up tbeleadership slots, including the top positions ia tbe Senate and Chamber of Deputies and tbeofongressional committees The Aylwin team's emphasis oe securing at the outset an effective congressional leadership as the key to an orderly legislative process was driven partly by the perceived need to compensate for ihe fact that many legislators have no prior experience io the Congress, which has not met, and also by tbe fact thai Pinochet relocated Congress from Santiago to the port city ofinally, the team succeeded in having Christian Democrat Gabriel Vaides elected Senateital position that permits him, as one of tbe four civilians op the National Security Council, to serveotential couolerpoint to Pinochet and the three other service commanders in debates over whether government actions contravene tbepromilitary national security provisions inserted by Pinochet in0 Constitution. |
The Aylwin team's efforts to draw closer to labor,constuueacy with high expectations of the newhave borne fruit early. LaborCotuzar's first action upon taking office wasleaders of the Unified Workersmain organized laborgovernmeni is commiued to liberalizingrestrictive labor code,|
Senior officials also reassure itist groups tbat ibe changes would threatentbe business ccenrounity nor free market cecenm-icti J
COPODElear majority in the lower house of Congress but two seats shy of controlling the Senate, the Aylwin government also skillfully avoided
Sclent
in agreement reached in JanuaryheIbe Confederal ion of Production andmoat important businessmen's- concurred tbat proposed revisions lo tbesafeguard orderly eccascoue growth,markets, and foster domestic and foreignwhile also ensuring higherliving standards,ore equitableof wealih. They created joint commissionsproposed code modifications thatfoe industrywide collective bargaining,strike rights, elimination ofto Are workers for political reasons,wages and retirement benefits, andunion dues- Tbe accord was followed bybetween labor groups, businessand government representatives on the termsinxpected
anaaaaaaai
Looming ChaUrngM
Aylwin and his nun men face difficult choices in selling priorities for their first year in office Some sensitive political issues, such as addressing earlier human rights abuses anday to shorten Pirtocbet's stay as Army Commander, are charged with emotion and high expectances for members of COPODE and the left in general. Others, such as tbe economic team's ability totrong economy while expanding social services and improving living standards for the poor, as well as how the new President goes about upgrading civil-military tela-lions, will be important tests for civilian rule.(
In our view, however, the new government has already bogged down partially Inevise tbeand administrative restraints rushed through tbe junta duringast months in office, and it will have to move skillfully if it is to implement key parts of ibe COPODEhe coming months.
ini**
CongreascouTdDeiiedup some time trying to revise these laws and couM squandertime investigating publicly exposedby ihe former regime, such as sales of slate
Stumbllagblocks Left by ihe Pinochet Retime
ityKM
e verston^^^
During ihe interregnum between the election and the inauguration. Aylwin and hti advummixed'counter numerous legislative and administrative measures introduced by ihe lameduck Pinochet regime in the apparent hope of limiting the new government's options. The most far reaching of these measures was the Organic Law for the Armed Forces limiting the new Presidents aulhorily over militarythe budget, promotions, andthe service chiefs to the Pretidenl only in time of war. and creating an autonomous board of commanders headed byas Army Commander. In January.under pressure from the Concertatton of Parties for Democracy (COPODE) and the mainparty, and at the urging of his military and civilianto modify the mostfeatures of the bill and to accept la placing the military under civilian authority^ 'evtnhtless. the promulgates left the new President sunclear regarding the military. The regime also pressed ahead unilaterally with other legislation regulating the Congress, the State Bank, the Supreme Court, the Judiciary, the bureaucracy, and the
These moves heightened the distrust between the incoming administration and the regime andpromises from the Ay twin camp to leek tarty congressional reform of ihe most objectionable bills; under one of iheit. the new government could not remove career government employees or appointagjieioli below under secretary rank in most agencies. COPODE leaders also stepped upwith rightist partiesoint legislative agenda to ensure rapid passage of the reforms through Congress
resources to Pinochet cronies and transfers of valuable state properties to the Army. Nonetheless. Aylwin sees congressional overhaul of the most restrictive tawsop priority and convoked tbe Congress into extraordinary session inmonthsioackage of judicial reforms and proposed tax increases to cover social
Tbe new administration's commitment to reforming basic features of (he inherited political system means it must tackle constitutional and other key statutes tbat rigidly regulate most basic political functions, including electoral registration and voting,and organization of political parties. Congress's prerogatives, tbe structure and functioning ofand regional government, and, specifically, the relationship between the armed forces and the central government. The rules governing congressionalof these diverse measures are complicated, however, reflecting Pinochet's efforts to safeguard bis authoritarian system from meddlingivilian successor. For example, certain constitutionalwouldwo-thirds majority of bothmore votes than COPODE alone can muster, j
In addition to moving more expeditiously onfront, tbe Aylwin government realizestotake charge" attitude onor risk being seen as indecisive. Many inas well as civilian conservatives, arethe ability of politicians long in opposition
lively
fulfill its promises both to sustain Chile's free market economic policies and to improve living standards for the poor. Aylwin has acknowledged this skepticism and tbe difficulty of implementing COPODE's broad gauged program and has pleaded for patience and cooperation from his follows JJ
Human Rights
One lightning rod for the new government is how it addresses the controversial issue of human rights abuses by the military and the intelligence services
The Pinochet Era and Human Rights: The Numerical Record
Compilations of human rights abuses committed3 vary widely, but. In our view, the most credible are the following:
eople were executed In the weeks immediately following the turmoil of the military coup.
' About 7SO others were picked up by the security services and "disappeared"4
Over the post decade, several hundred have been killed by security forces, many of them during antiregime protestsr by death squads widely suspected of receiving support from the Pinochet regime.
Several thousand were arbitrarily detained andoftentheH
during tbe Pinochet era, recently highlighted by the discovery of mass graves of persons seizedafter tbe military coupn one side of the issue are the farew human rights groups, some in tbe legal community, and many relatives of theho advocate airing all human rights questions completely and prcaecuting military and other personnel responsible for abuses dating backhe Communists and even some leftists in COPODE have called for investigating Pinochet and for wholesale indictments of military on)cers,Mopposition to inisvicw are moat Army officers, many In tbe other services. Pinochet and otherstillretired senior intelligence servicemany conservatives, who adamantly oppose anyor formal charges against more ihan aof officers.
The in increiie legolnicneffectuly.
bu promised publicly and privately toull investigation of human rights abuses under ihe Pinochet regime, but he has emphasized that only individuals, and not the armed forceshole, will be held accountable and that witch hunts must be avoided. In April, beommissionof eminent politicians and jurists andthem to document Pinochet-era abuses and to recommend appropriate compensation for tbe families of victims; the commission, however, was notto recommend prosecution of human rights offenders. Aylwin also announced that, once the investigation is completed, he will consider pardons. While most Chileans applauded Aylwin's prudence, [rightist politicians are ild trigger conflict with the military. The main rightist party.as argued that tbe commission'sshould be broadened to include politicalbefore the Pinochet era. In our view, the RN ts trying to capitalize on the controversy to press the government for compromises on legislative matters.
Aylwin also faces pressure to resolve the statusolitical prisoners still in prisontrial and toegal way to reducesentences handed down for politicalthe Pinochet regime. Tbe new Presidentto ending the death penalty,court jurisdiction over civilians, andthose held or convicted for nonviolentAccordingly, be has freednd promised to pardon othersforsoon as the legislatureon presidential authority lo do so.however,RN is
holding off on supporting this legislation as it tries toolitical deal with the government. |
Despite some advances, Aylwin still bas notlan for at least progressively reducing tensions on tbe human rights issue, even if be realistically does not expect to resolve it completely any time soon- Unless he tackles this and related questions, such as the need to rebuild an independent judiciary, key political groups may conclude that the President lacks decisive-ness. Even Aylwin team members admit. I
taking human rights cases reforming antiterrorist legislation probably is only the tin: step, because tbe civilian court systemIhe current crop of judges up io and including those on tbe Supremeto be overhauled. In our view, however, tbe new government has not yet decided bow toetter judicial system.|
Dealing With tba Comaswitsti
Another difficult decision for the new administration is when and bow tbe Chilean Communist Pany (PCCh) should be legalized. The PCCh already bas secured consent from tbe National Electoral Service (SEN) to gather ihe required signs lures of0 partyfirst step in the drawn-out legalizationregulation still on the books apparently precludes legalization of the PCCh and other far-left parties. President Aylwin, and bis Interior Minister who hasuthority over the SEN, must decide whether to ignoreangerous precedent ia legalisticto seek its repeal by Congress.
Tbe Aylwin learn bas devced much attention in recent months to nroventini tbe PCCh disruptive rede, |
il appears
legalof Chile's politicalbe lesshreat to the consolidation of democracy ibanlandestine party, which might not be disposed to restrain affiliated terrorist groups. I
Nevertheless, we believe thai unless tbe PCCh for-mally forswears violentylwin and hismay decide not to confront the right, the military, and diehard Pinochet loyalists by continuing tothe PCCh. On the other hand, failing to press for PCCh tegalitattoo could have costs as well, and Aylwin's standing with the left and within his own coalition could slip. Moreover, his indecision couldretext for increased far-left terroristsuch as the two dramatic assassination attempts against former regime officials that have taken place since Aylwin took office. The dissident faction of the Manuel Rodriguez Patriotic Frontclosely associated with the PCCh, claimed responsibility for these attempts and has promised more suchnd other, smaller terrorist groups have also recently stepped up their activities.
The Pinochet Factor
We believe the thorniest problem faced byhis advisers has been how to deal withproblem" without damaging overallrelations. Pinochet's reluctance to forgoas power broker even as be stepped downpresidency implicitly threatens Aylwin'sPresident's
by laws and decrees on military matters left in place by Pinochet; two particularly troublesome statutesthat tbe military's share of the national budget will not be cut, and limit the right of Congress to investigate military abuses.
Nevertheless, in our view, Aylwin has demonstrated both firmness and astuteness in his etTorts to improve overall civil-miliury relations, specifically in reacting
to bis authority, Aylwinenior member of his party as Defense Ministerwithcivilian defense tub-secretaries for each branch of the military He was careful, however, to select political moderates who bad not previously beenoward the military, be eves replaced his first choice for Army sabsecretary after Pinochet objected to bin. He also askedFernando Mattbei and Rodolforespectively, of the Air Force and Carabine-res, tbe paramilitary nationalstay on. Matthei and Stange. in tarn, have declared publicly
rret
hisIn
containing Pinochet. Senior officers will be prepared to proteat over any signs of disrespect for the formera still admired throughout theover any apparent effort to ignore the interests of the armed forces on major national policy issues. Military officers almost certainly would reject any move by the Aylwin team to head Pirtochet accountable for human rights violation or to abrogate the amnesty law he authoredhichlanket pardon for such rxTenses by regime officials committed before tbat date. While Aylwin and hit advisers appear ready to respect these Ubcos, tbey realize they cannot afford to overlook any attempt by Pinochet to uk his Army commandower base to undermineperhaps evenhad-ow government
rbe Econosny
One of the Aylwin government's greatest assets is that it has inherited an economy that is ruriaiag efficiently and riding the crest of aa expansion unparalleled in South America in recent years. In contrast to new leaders elsewhere in tbe region, Aylwin faces neither the need to adopt drastic economic subilirnticflmea-sures nor the threat of major social unrest |
The Chilean economy is now in its seventhyear of growth,ercent annually aad even approachingercentt has benefited from policies tbat have fostered growth in traditionalwood products,and fishcontributingercent increase in industrial-sector production9 atone. Household income has grown steadily for several years. Real wages started to risencreasing byercent ia tha past two years,
|ind some nonmonetarysbo improved. Unem-raoyrnent, which surged to more (baaercent in the, is currently atercent, although the minimum wage still lags1 levels. Nevertheless, high levels of consumerand business investment spending pushedop74 percent last year, it was running at an annual rate of overercent at the time of the inauguration Moreover, concern that the tlTnVtwry was overheating led tbe Pinochet regime to tighten monetary policies during its but few monihs. tbe full effects of which have yet to be felt in key economic sectors.P
ound Economy
vigorous, growing economy reflects itson the market system, private enterprise, and foreign trade. Its hospitable climate for the private sector and favorable regulatory environment have attracted significant domestic and foreign Investment. Although it still owes foreign lenders about SI6 billion. Chile hasodel debtor, remaining current on principal and interest payments andits foreign debt by about S3 billion5antiago has also maintained complianceeries of IMF programs and has drawn substantial World Bank support for development projectsi
Shortly after3 coup. President Pinochet adopted free market policies to turn around the ailingby Marxist principlesercenj inflation rate. He turned for helproup of young economists, largely educated at the University of Chicago and later dubbed the "Chicagoho drewlan based on free enterpriseeduced government role In ihe economy. Pinochet applied it gingerly al first, and vigorouslyenerating sharp reductions in inflation and the highest per capita growth in Latin America during theA
The convergence of external shocks and rigidity in economic policies brought the growth boom to an abrupt end0he value of Chile's exports fell sharply, rapid increases tn international Interest rates pushed up debtand foreign borrowing, which had beendomestic growth, dried up In the wake of the Mexican debl crisis. GDP fell by about IS percent. and the number unemployed or In emergency jobs programs surgeduarter of the work force. I
Stimulative policies did notustained recovery until Hernan Buchi. installed as Finance Minister inS, capitalized on earlier free market reforms with an export expansion scheme based on the private sector. He began by emphasizing Chile's comparative advantage in its traditionalminerals, forestry, and agricultural and fishing products. The expansion has since spilled over Into other sectors, generating continuous growthercent annually beginninghe programs were Implemented without generating large fiscal deficits, helping inflation to fall7 percent by
International financial support for these programs was available largely because of Chile's good recordebtor and its favorable climate for domestic and foreign investment. Commercial creditorsaboutillion in payments duend graved new hens of more ihan SI billion, leaving Santiago with sufficient funds to pursue export promotioneries of IMF loan programs, beginningas alsoto continued financing for economic programs, and the World Bank provided0 millionAdjusimenin addition to extensive project lending.
Chile's favorable business climate Increased private investment sharply and enticed Chileans to bring back and Invest more than SI billion held abroad. Equitable treatment of foreign Investors haseavy influx of foreign funds.9 alone, nearly S3 billion in foreign investment projects were
Figure 1
Chile: Selected Economic
Ytwcndi^idrtfldn ihmc in ftoranwMpcqpirat
ihe growth of export earning* probably will (low incase if world copper prices drop from recent highbey also acknowledge that tax revenues may decline: moreover, their decision to halt prtvatiutioa of state enterprises, at leastdecide on pricing and legalfurther limiting government revenues. |
At the same time, Aylwin and his advisers have promiied to improve ihe lot of those who have aot shared in the economic growth ofercent of Chileans they claim live in poverty. Tbe administration has targetedamong urban you tsevere housingdeclining health services, and an inadequate educational system for corrective action; it hasobtained congressional approval for raising the minimum wage.
To make inroads in these areas withoutiscal deficit, Aylwio has atated that increases in social spending will be limited toercent of GDP over the next few years, which be proposes to finance through higher taxes on business, increases ia aid from abroad, and funds made available listing the foreign debt. I
because efforts to slow tbe ovcrneaica economy are likely io reduce government revenues,iscal deficit while expanding social spending may prove difficult. It is unclear bow muchroblem this will be. but, in our view. President Aylwin and hit advisers will need to clarify their social program* soon or face criticism from witjhin the coalition that the government is moving too slowly. In any case, the admin Lit ration may have to parry efforts by groups outside the coalition, such as the Communists, to embarTaas the government with demands formayor fcasding bikes. |
Rfforraalatiai FPoaky
The Aylwin team, oo record as intending to reorient fundamentally Chile's foreign relations, has already
' DtapiM UM stgaincaa* gaiaa ia dmarsuVngecentabetstpercent of fanga etctiange rrcuptt tr* uJl
reca copper eirom ggfltstsssssssssssa1
hophe SU'-fiCUDlLlO)etpeeiad drop ia onca* anxnr ilpilttamtr CODEICOi contntauioo lo th* aalionalylwin's ttrm SssssssssBal
begun to repair the damage to the country'sresulting from the legacy of the Pinochetts first step was to restore relations with as many countries as possible during the early months of the new government. On inauguration day, Santiago signed protocols reopening relations with the Soviet Union and four East European countries. Spokesmen for the new government announced that they exrjected to strengthen relations with other Latin American states and to join or re)oin regional organizations. The presence of Nicaragua's Daniel Ortega at thesignaled the resumption of bilateral tics, which bad been suspended for several years. Soon afterward. Mexico restored relations brokenhileannounced the reopening of Chilean diplornatic missions in Trinidad and Tobago. Sunname. Guyana, and Jamaica^
Two countries have been exempted from ibisin Chile's global diplomatic
tions woukJoereonoltorily gradually, and South Africa, with which ties are being dowi
} coun. the So-sat Ussoa,watcoin met, and Mexico brokt relation withth* Scandinavian couautta. France, Sp* in. Italy, anday wera mol to Chis* lor aaunded earioda.ortow?'Um but vtsiiead or sum waseiadeat ia INI. Fiaoebct tatemd la*so crsnat abroad; a* wa*by UN eaacss**UN OaoeralNGAtsaauoaa aady Praidcni Ferdinand Marcos (ran wilingalready en route. For years, tbe UN Human Ri|buand ibe L'NGA singled oil Chile's human nghn record
Chronology of ihe Leielier Affair
6
Former Foreign Minister and Ambassador to the United States Orlando Leielier and his American coworker Ronnie Moffii are murderedomb explosion in Letelter's car on Sheridan Circle In Washington. DC.
8
US attorneysarrant for the arrest of the prime suspect in the case. MichaelS citizen working for Chilean intelligence, whom US officials have located residing in Chile.
98
Chilean authorities expel Michael Townley and hand him over to FBI special agents in Santiago, who escort him to Washington where he is arraignedS district court.
8
Michael Townley and US attorneyslea bargaining agreement, and Townley begins his testimony.
18
The US attorney In Washington. DC.rand Jury indictment ofChilean national intelligence officials, Manuel Contrtras. Pedro Espinosa, and Armando Fernandez Larios, as well as three Cuban-Americans, for the murders of Letetler and Moffit.
8
US Ambassador to Chile delivers the request for the extradition of Contrtras. Esptnoza. and Fernandez Larios to the Chilean Foreign Minister.
The Chilean Supreme Court formally denies the US request for the extradition of the three suspects and declares thai there is insufficient evidence to warrant an investigation of the Leielier murder In Chile.
47
MaJ. Fernandez Larios. who fled Chile iolea bargaining arrangement with US authorities, isin US District Court tn Washington, DC.
The US Government asks lhat the Pinochet regime expel Contrcras and Esptnoza and place them at the disposition of US authorities.
7
The Pinochet government rejects the US request for expulsion of Confreres and Esptnoza.
9
The US Government4 treaty with Chile, providing for International arbitration ofdisputes; Chile has yet to accept the fullof this treaty to the Leielier case.
foreign credits and access io export markets. An early achievement in this area was the four-year, S2 billion economic cooperation agreement signed with Spain it theflHLaawaaaaaw*1
^smaller aid packages from several other West European countries are also in the offing. The Aylwin government apparently hopes economic ties to Europe will help ensure access for Chilean exports after tbe European Community integrated market system takes effect
Tbe final but key foreign policy priority has been toooperative relationship with Washing-ion across the board.
Aylwin and his team KeeiuyappreciBlSwasningW role in the restoration of civilian rule to Chile and regard closer bilateral ties as vital to consolidating democracy. Tbey thus recognize the need to manage deftly the handful of bilateral problems inherited from Pinochet. I
s^ret^
mem important of these issues is bringing io Justice those responsible for the Letelicr murder, which must be done before IS Cor. (rest tons!on military sales, training, and other assistance to the Chilean armedmandated by the Kennedy-Harkinbeytwio and several close advisers have publicly acknowledged their determination toolution acceptable to the United States that is within the constraints of Chilean law.
In our view, however, the government willifficult time satisfying the various parties in Chiletake in the Letelicr case, I
|Continucd delay coulderception that Aylwin ii indecisive, or even unwilling to tackle overall human rights issues, and, no matter bow the case is addressed in tbe new few months, it bas the potential to sour relations between tbe government and tbe military. |
The Aylwia government, in our judgment, abo sees several more minor, bilateral issues as benchmarks of US good will. One has been Washington's willingness to mure trading benefits under the Generalized System of Preferences (GSP) and investmentprivileges under tbe Overseas Private Investment Corporation (OPIC) that were removed two years ago because of tbe Pinochet regime's restrictive labor policies and poor human rights rccorr.
In addition, although President Aylwin accepts that major US aid is unlikely, he probably expects more
rhetoricalropean offers of assuiSncema^enieluTgnope
' Sec inset,hronology of bow tat dispute evolved foHowinfl the issauUssUon of former Chilean Foreign Minister Orlando Letcher ae^iaAmf ii;ari cewoetc* in Washington in September
in the new administration that,inimum.will contribute to health, education, andprotects in line with COPODE's program.as tbe Aylwin governmentommercial debt restructuring package during ihe next few months, it undoubtedly will compare the US response io Santiago's request for backing withsupport for debt relief and new loans for the Pinochet governmeni on several occasions during Ihe.
Finally, in line with its plans to resume diplomatic relations with numerous countries, Santiago may move too quickly for Washington's taste to restore ties to Cuba. It could also seek relations with such pariah stales as Libya or accept PLO diplomaticin Chile.
Outlook
We believe Aylwin will turnenerally effective performance as President over tba next year or so. In particular, we expect bun to make major progress toward removing obstructive legislation left byand reforming the Constitution, to manage tbe economy well, and to place anJ-military relationsounder footing. In our view, these key factors will work io his favor
Aylwin's solid electoral mandate and hb proven political skills. Aylwin shows clear signs oftrong executive with the power and skill necessary to implement bis policies within tbe established constitutional structure. He is likely lo continue his practice ofide spectrum of political supporters and carefully gathering authority, thenecisive asovf.
A competent team of advisers and Cabinet members who have already demonstrated their grasp of whatound program of government. Key advisers have skillfully handled difficult political negotiations since the election, and the Aylwin team shows strong cobesiveness and discipline.
IS
t^
solid position in Congress and steady rnovemeni toward legislative accommodation with moderate rigbtisU. At tbe opening of tbe emergency session of Congress, tbe major parties agreed to cooperate in enacting several of tba executive's initial proposals, and we believe it isatter of time before tbe main rightist party, RN, reaches anwith COPODE; already it has ed Aylwin's fiscal reform proposal |
Continued unity within COPODE, whose keyparties clearly still concur thai making the new government work should override partisan interests.
The determination of the Aylwin team to reach an understanding with tbe military on its institutional role under civilian government. Ayiwia'i strategy has been to avoid confrontation and to co-opt key sectors of the high command. His decision io ask Generals Matthei and Stinge to stay on. forhas made tbem more his menthanPjnochet's, ih our judgment. We share UmI |'irw that his assertion of full control over Use Army and Navy will be more gradual, but eventually successful.
The likelihood that Pinochet's options forthe political process will continue to narrow over time. We believe that Pinochet will eventually choose to step down as bead of theeven daring Aylwin's first year in office- hiswould help consolidate Aylwin's authority over the military.
Widespread publicby leaders of most parties aad ia business, banking, andChileong period of stability to heal its political wounds. This perception should helpengthy honeymoon to Aylwin,
administration to give priority to investigations or pre: Mil it-.oninstance.last-minute illegal transfers of governmeni facilities lo tbethe expense of more immediate practical matters, such as streamlining tbe government bureaucracy and adoptingin time to hold municipal elections by
sudden breakup of COPODE, perhaps overamong centrist and leftist member parties on bowddress the human rights issue. In addition, some member parties might defect in order to present independent slates for municipal elections likely to be scbedoled for
of the government toorking alliance with rightist parties in support of itsagenda.
A shirp decline in economic activityapjd increase in inflation, caused by rash policy shifts or world market conditions.*
A lurge in disruptive polilical aad Ubor agitation, which might be occasion edave of strikes evenew labor code is adopted.
An escalation of far-left terrorism, such as by tbe dissident faction of Ibe Manuel Rodriguez Patriotic Front
to come to terms with the militaryroad range of civil-military matters and to contain Pinochet. Aylwin's standing with tbe military could deteriorate sharply if, for example, the administra-tion moved suddenly to abrogate1 amnesty decree; toarge number of military ccnccrs. including Hooches, for past human rights abuses; or to cut tbe budget for tbe armed forces."
Scenarios
Despite the favorable signs, Aylwin's prospects could be set back by unexpected developments on any of several fronts. These include:
'Seeot an elimination of constraints on economic pokey inherited from the Picecneironically, meat Army officers probably woulcTcErpt prosecution of retired Central Cecums under (tie Letelicr cue because ol iht damage to the Army's reputation caused by tui ma ay snsavory.bileead of nuionalbe tnid-
of tbe new team to take hold of the government as effectively as generally expected. One negative indicator mightecision by the
We judge, however, that, even if facedombi-aalioo of iuch negative developments, Aylwin would muddle through the nexto IS months and would not lose control over essential aspects of gewerrtment, or abandon free market exoeornsc policies or has legislative agenda. Even if there is an upsurge io far-left vic4er.ee. Ubor unrest, and agitation by other groups, we judge that the mood of the country would remam sufficiently supportive of the democraticto preclude major political instability.even if tbe military has reservations in coming months about perceived moves against it, the officer corps is unlikely to try to destabilize the government.
Finally, we believe there itcnuibility that harassment by Pinochei might intensify enough to paralyze ihe Aylwin government and generate sufficient politics! uncertainty over time to spark coup plotting within the military. It could unfold, in our view, only if President Aylwin demonstrates near total incompetence ia setting policy, managing hisand dealing with Congress. Pinochet would also have to dramatically broaden bit base of support within tbe Army, as wall aa in the other services, and public attitudes would have to shift overwhelmingly in favoreturn to military government Even under these arcumsunces.move by Pinochet to resume power bydistinctresidential bidhen he is eligible to runalmost certainly spill the military and spark massive popular unrest.
prevail for somepossiblythat of military-to-military ties. Even if Aylwin cannotormula to resolve tbe Letelicr case and Washington, therefore, is unable to lift restraints on military ties, Santiago will remain cordial toward tbe United States, in our judgment. At worst, the Aylwin government might sour somewhat on the bilateral relationship if the United Slates fails to meetexpectations for tbe prompt restoration of GSP benefits and for US assistance in persuading Chile's creditors to write off its foreign debt, perhaps under the Brady plan.
The only major development tbat would alter our generally favorable forecast would be tf. against strong odds, Pinochet and his hardlineothers ia tbe armed forces uccessful coup andilitary dicialorship. If condiuonsoup appeared to be ripening over tbe neat year or so, however, we believewith West European and other Latin Americanbe able to turn aside such an attempt by forewarning Pinochet and tbe military of the adverse consequences of such action.)
for the United States
In our view, the implications for the United States flowing from developments in Chile since8 have been overwhelmingly positive The orderlyof power from tbe Pinochet regimeew. freely elected civilian government, beaded by rear*on*ible, pro-US and pcodcmocratjc leaden,ongtime US goal for Chile. Moreover, if our judgment about the near-term prcapecu of tbe Aylwin govern men! is correct, basic United States interestsis Chile will continue to be served-
The handful of potentially troublesome bilateralin our view, do not pose major risks to the United States. The one area where tension is likely to
hoe
Appendix A
successful growth record, employmentand foreign exchange earnings of Pinochet's Uissez faire economic program have won plaudits from members of ihe incoming Aylwinpledged not to tamper with the macrocco-oomic policies they inherited- Nevertheless. Pinochet's economic team worked hard during iu final months in office to consolidate the institutional changes it had made in order to Impede any future government's attempts to returntatist economic structure or to damage carefully cultivated relations withcredit
A key aim of Finance Minister Hernan Buchi'i policies under Pinochet was to broaden the private ownefihip of firms and establish supporting financial markets. Accordingly, during its final months the Pinochet regime increased the pace ofdespite mounting objections by officials of thegovernment who were not ooneultcd. Oneused by the government for privatization was to bold blocks of stock both for the general public and for employees of the firms in question, wiih financing available for both groups. Pinochei regime omoab apparently believed thai wide holdings of stock would make it more difficult to renstionalize firms. Tbey also hoped to deflect charges of sweetheart deals to sell enterprises below market value; rteverthelesu,
reril improper tales ustr resources to Pinochet cronies apparently occurred during the postelection transition. Inprivate peasno funds, one of the largest single sources of Chilean capital, were pertrtitted to investreater range of private firms, widening the capital market aad rpornnt public interest ia the financial health of private enterprises.
BeginningS, tbe Pinochet administration alto manipulated the sire and composition of iu external debt to facilitate servicing and to encourage future governments loood credit rating. During the last five years of Pinochet's rule. Chile eliminated nearlyillion of debt owed to foreign commercial
banks using debt-equity swap* and buying back iu own debt on the secondary market. Tbe consequent reduction io interest due by as much0 million annually has lessened the debt service burden on the newitharp rite in amortization inincreased iu ability to maintain good relations with creditors. Total foreign debt fell only by about SI billion, however, because Pinochet continued to borrow to meetxternal financing needs, turning increasingly to multilateral development banks. Debt to multilateral institutions, although it generally involves tower interest rates, cannot be rescheduled; the severe penalties forto tbe IMF and World Bank will increase itcssuie on Santiago to keep future paymenu current.
To assuage their fears that future administrations might use the printing of money to support overspend-inn. ihe outgoing economic team also pushed through legislauoo to make the Central Bank morealong the tines of the US Federal Reserve System. The Aylwin team objected strenuously to this bill; even prominent rightists expressed renovations about Pinochet'stbat the proposed law would preclude lending by (he Central Bank to ihc treasury to cover futureBBwewawawa^Bwawawajn rraponicj iq in<
workedompromise, shortly before the ejection, with key Aylwin advisers whereby they jointly selected the new bank governing board, coo-sis ting of two directors from tbe Coocertation of Parties for Democracywo chosen by Pinochet,ew. nonpolltical chairman. Tha chairmanonsensus choice who will serve for only two years, allowing Aylwin to appoint theyear term- Nooethelesa. the powers of tbe bank's directorate made Pinochetofficials confideni that it would be able to withstand any pressureuture government to distort monetary policy or provide loans to cover excessive spending.
In addition,iscal year coincides with tbe calendarconstrain spending by tbe Aylwin administration for theof the year. Budget calculations for this year were based on conservative figuresercent GDP growth and an average copper price of onlyer pound; the assumptionpercent rate ofthe currentresulted in reduced spending allocations9 for some ministries. While higher inflation will also boost tax revenues, the increase is likely to lag behind spending and throw the budget out of balance. |
Original document.
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